May 16, 2022
Pros and cons to leasing or financing your next car in Canada
Lease vs finance – which is the best option? This is the question everyone is faced with when it comes time to shop for a new ride. Depending on whom you talk to, you’ll get a completely different opinion on which option is best. Often, leasing a vehicle costs less than financing, but there are restrictions.
Which is the best choice? It comes down to your specific driving needs and financial situation. This blog will compare the options between leasing versus financing, the pros and cons, and answer common questions.
What is a car lease?
Leasing a vehicle is like a rental agreement. It allows you to drive a new car for a specified time. One key distinction with leases is that there are restrictions. You are subject to a kilometre restriction, there are early termination fees, and you may be required to pay for excessive wear and tear when returning the vehicle.
How does a car lease work?
A car lease typically lasts anywhere from two to five years. You are paying to use the vehicle and the vehicle value you use during the lease with a lease. Once the lease is up, you return it. You have the option to buy the vehicle outright if you so choose. Leases can come in many types; standard leases, lease to own, and lease takeovers.
It is better to lease or finance a car?
- How much of a monthly payment can I afford?
- What is more important – the monthly payment or the total cost of the vehicle?
- How will I pay for the car – cash on hand? Financing? Line of credit?
- Do I plan to make a down payment?
- How many kilometers do I drive?
- Do I want/need a new automobile every few years?
- Do I want something to trade in on my next vehicle?
Even though choosing an automobile can be a very emotional decision, you need to make a rational decision, especially regarding finances.
What’s the difference between leasing and financing a vehicle?
The critical difference between leasing and financing is vehicle ownership. At the end of a financing agreement, you will own the vehicle. With a lease, you will not own the car. With financing, every payment you make goes toward paying off your loan. Once the loan is paid off, you have 100% equity in the vehicle.
Is it more affordable to finance or lease a car?
The overall car cost of leasing versus financing can change based on the term. In the short term, with all things the same (term, price, interest rate, down payment), a monthly lease payment will be more than 30% less than a monthly finance payment.
However, as the length of the term gets longer, things begin to balance out. Monthly payments can be reasonably even for medium-term agreements. In the long term, financing can be cheaper than leasing. Consider all financial factors, terms, and options to determine which option is the most affordable and meets your financial needs.
Compare your cost options by using this lease calculator.
Lease vs finance considerations
Once you’ve figured out what you can afford, you need to consider the vehicle features you want/need and how you will use the vehicle.
What are the different types of car leases?
Another component to leasing a vehicle in Ontario is the type to move forward with. The most common option is a closed-end lease which allows consumers to return the vehicle at the end of the term. Here’s a look at other options :
- Lease to own vs financing : When leasing to own, you will own the vehicle like when you finance. The main difference is that the vehicle owner (dealership) will hold onto the vehicle title when you lease to own until it’s paid off. When you finance, the title is transferred over right away.
- Finance lease vs operating lease : In a finance lease, ownership is transferred to the lessee at the end of the lease term. In an operating lease, ownership is retained by the lessor during the term.
What is vehicle financing?
When you finance a vehicle, you borrow money from a financial lender. When you finance an auto loan, you have entered an agreement to make monthly payments. You will pay more per month compared to leasing. Once the loan is paid, you will own the vehicle. Auto dealers have relationships with several lenders. You can choose one of their lending partners or get financing independently.
When is it best to lease a car?
Ownership costs can quickly add up, and drivers continually search for ways to reduce those costs. For some people, leasing is one significant way to reduce the monthly costs.
Studies show that people who lease are as satisfied as those who finance an automobile. According to CTV news, 66% of people who lease were very satisfied compared with 69% who were very satisfied with financing or buying.
When you lease, you enter an agreement with a leasing company that gives you the right to drive the vehicle of your choice - leasing is like a long-term rental. Your payments don’t build equity as an automobile loan, and payments do.
You can still negotiate the terms of the deal, including the length of the lease, monthly payment, rate of interest, and kilometre limits. Consider negotiating a buyout price (residual value) at the end of the contract – if you decide to buy it.
Benefits of leasing
- You want to drive a new vehicle : Lower monthly payments allow drivers to drive a model that they may not be able to drive if they had to buy or finance it, and you will enjoy a car during it’s most trouble-free years.
- A new car every couple of years : If you like driving with the latest features and technology, leasing is a great way to get a new one every two to four years, without worrying about fluctuating value when you want to re-sell.
- You’ll be covered under warranty : You’ll likely always be leasing a new model and will be covered under the manufacturer warranty.
- Lower monthly payments : Many people need to watch their bottom line and keep monthly expenses as low as possible. Leasing allows people to drive a new automobile for less than financing a new one.
- You don’t drive a lot : If you don’t drive a lot, you don’t have to worry about kilometre limits or depreciation.
Disadvantages of leasing
- Owning the vehicle : When you finance a vehicle, you fully own it at the end of the agreement. When you lease, you only have the right to drive it, but you do have the option to buy it at the end for the value stated in the contract.
- Mileage limits : There is always a set amount of kilometres you can drive with a lease. If you go over, you’ll have to pay a per-km fee.
- Wear and tear : If your vehicle shows signs of excessive wear and tear, you’ll have to pay extra fees.
- Mods : You can make as many car modifications or customizations when you own it, but any after-market additions will need to be removed when it is returned.
- Ending the agreement : When you finance, you can sell or trade it in whenever you want or need to, but you will still need to pay off the outstanding loan amount. In most cases, you will be charged a fee for breaking the lease before the end of the term. The termination fees will be due all at once.
- Returning the vehicle : At the end of a lease, you’ll have to pay end-of-lease costs, but if you finance, once the payments are done the vehicle is all yours.
Does leasing or buying a vehicle affect insurance?
Your decision to lease or finance does not directly impact your car insurance quotes. However, you will need to meet the leasing company's requirements when leasing. You’ll also need to consider gap insurance, which is often included, but be sure to ask if it is included.
Since your leasing company still owns the vehicle you will need to have specific coverage in place to protect the car. Leasing companies will require you to have comprehensive insurance and collision insurance.
When does it make sense to buy or finance a new car?
Owning gives drivers much more flexibility with how they use their car and what they do to it. Buying allows you to make modifications, drive it as you please, and use it as an asset.
If you have the resources, you can pay with cash – an option that gives you good negotiation power. However, most people take out a loan. You can secure a loan through the dealership you are working with, but you can also get a loan with your bank, a lending company or even use a personal line of credit.
When purchasing a vehicle using a loan, your lender is the one who owns the car until you finish paying off the loan. You can negotiate the loan term, the interest rate and the monthly payment with your finance expert.
Leasing a vehicle may not be a good idea for you if :
- You drive a lot : When you own your car, you don’t need to worry about the amount of kilometres. There are mileage limits and financial penalties if you exceed them with a lease.
- You plan to keep the vehicle for a long time : Once you pay off your car loan – which is often a 48 to 60-month term, you own the car. It’s an asset you can use toward trade-in value on another new automobile or continue to drive payment-free.
- You want to customize your car : Some people like to add extra features such as specialty tires or safety features. If you lease a vehicle, you must remove any modifications or customizations you have made when the contract is up.
Lease vs finance FAQs
When you lease a car, you need to have an active policy and meet the minimum requirements outlined by the lessor. These requirements often go beyond basic policy limits, so compare Ontario car insurance quotes.
When your lease agreement is up, you have the option to buy it. This decision takes careful consideration – you’ll want to examine the vehicle condition and the cost of the vehicle buy-out. Take time to understand the residual value (an estimate of how much the car is worth once the contract is up). This can be negotiated as part of your lease contract.
Leases are typically available for a minimum of two years. Some dealers may offer a one-year lease, but it is not very common.
Financing a used car is an effective way to purchase a more affordable vehicle. Most people only lease when they buy a used car if they have low or bad credit. It’s a way to get a car when you have less than ideal finances.
Consider costs and limitations when you compare leasing vs financing your next car
If the restrictions are leasing are off-putting for you, consider buying a less expensive new car or getting a longer loan term. Don’t forget to negotiate, search for a reliable car brand, and consider fuel economy.